The Hindu Business Line : Gujarat Apollo Equipments: Buy

INVESTORS can consider exposures in the stock of Gujarat Apollo Equipment (GAEL), a small-cap stock with a market cap of just over Rs 100 crore. The stock is attractively valued at eight times its expected FY06 per-share earnings. The company is expected to show an impressive performance over the next couple of years as the demand for its range of equipment has picked up substantially.

The Government has started awarding contracts for the National Highway Development Project (Phase III) covering 4,000 km of national highway. According to the National Highways Authority of India, 2,497 km of roads under Phase I and Phase II are currently under construction.

As orders were bunched up in 2005 after a brief slowdown following the change in the Government at the Centre, there will be a substantial ramp up in near-term business for road construction equipment makers. GAEL's order book is full to cover next six months' production.

In the long run, road construction activity is expected to be on full swing. Various projects such as NSEW, expansion of the Golden Quadrilateral and port connectivity projects have been lined up for the next five to six years.

The demand for equipment in which the company is predominantly present is likely to grow at 20 to 25 per cent annually.

GAEL makes equipment for building roads. Its flagship products are paver finishers and asphalt plants, which contribute close to 40 per cent of the revenue. The company has close to 60-per cent and 40-per cent market share respectively in these two products. Ingersoll Rand is one of the major competitors for paver finishers.

The market size for the company's products is estimated to be Rs 350 crore at present. The company has technical tie-ups with international players for its products such as high capacity batch type asphalt plants, front-end loaders and hot mix plant with electronic controls.

Export growth is also expected to keep pace with the domestic market. Exports, which contributed 20 per cent of the turnover last year, are expected to contribute 35 per cent in FY06.

In FY05, the company had invested a sum of close to Rs 11 crore (almost twice its FY05 earnings) in a company called Johnson Screens (India), a 51:49 joint venture with Johnson Screens USA. The company manufactures welded construction V-wire screen that finds application in water wells, oil & gas wells, mining and mineral processing, sugar and other general applications.

This company is expected to be a sourcing base for the parent company for supply to South-East Asian countries. This venture will also aid growth.

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